Muscle Maker, Inc (GRIL) Q4 2022 Earnings Call

0:00 Hi, everyone. Thank you for joining today's call. We're going to give it a few minutes just for everybody to funnel in, and then we will go ahead and begin. Thank you. Thank you, operator, and welcome everyone to MuscleMaker Inc.' 's year-end 2022 earnings call. Before we get started, I would like to say that this call may include forward-looking statements pursuant to the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. To the extent that the information presented on this call can discuss financial projections, information, or expectation about business plans, results of operations, products, or markets, or otherwise make statements about future events, such statements may be forward-looking.

0:56 Such forward-looking statements can be identified by the use of the words such as should, may, intends, anticipates, believes, estimates, projects, forecasts, expects, plans, and proposes. Although management believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. you are urged to carefully review and consider any cautionary statements and other disclosures, including the statements made under the headings risk factors and elsewhere in documents that Muscle Maker Inc. files from time to time with the SEC.

1:41 Forward-looking statements speak only as of the date of the document in which they are contained, and Muscle Maker Inc. does not undertake any duty to update any forward-looking statements except as may be required by law. For this call, All numbers disclosed have been rounded to the closest thousand and percentages have been rounded to the closest percent. With me on the call today are Muscle Makers Chief Executive Officer Michael Roper and Chief Financial Officer Jennifer Black. Michael and Jennifer will be presenting prepared remarks related to the financials filed on March 21st, 2023, and those documents may be found on Muscle Makers IR website, Newswire feeds, and on the SEC's website linked from the MuscleMaker IR pages.

2:29 At this point, I would like to turn the call over to MuscleMaker's CEO, Michael Roper. Michael. Thanks, Frank, and welcome to everyone joining us on our call today. 2022 was a transformative year for MuscleMaker as we focused our franchising efforts on Pokemoto and launched our new wholly owned subsidiary, Sadat LLC. In Q4 2022, we began evolving MuscleMaker by strategically diversifying into a food-focused company delivering high-quality, healthy food to consumers through our restaurants and to manufacturers via an international agro-commodity shipping, sourcing, and farming business. Our goal is to create a comprehensive global food supply chain company spanning from sustainable farming, agri-commodity shipping, distribution, production, and with the goal of ultimately reaching consumers through our restaurant, franchising, and meal prep companies. Today we'll be discussing our new diversification strategy and the impact of SADAT, our operational and financial results, and the performance of our restaurant division, with an emphasis on Pokemoto.

3:33 Now I want to turn our attention to Sadat, our new wholly owned subsidiary and its strategic focus on the global food supply chain. As I'm sure many of you have seen the recent announcements and want to fully understand what this all means to MuscleMaker. Let me start by recapping why 2022 was a transformative year from the beginning. Sadat was formed in October 2022 and is a wholly owned subsidiary of MuscleMaker Inc. Its purpose was to diversify the company's operations and lines of business from the local US restaurant and franchising business and catapult us into the global food supply chain. All financial performance of Sadat is consolidated upwards to the parent company, MuscleMaker Inc. Some of you might ask, as other private and institutional investors have over the past few months, why do we choose this trajectory?

4:25 Departing from our legacy restaurant and franchise business and the move into the global food supply chain. The answer lies in the understanding of the agriculture and food landscape today and in the very near future to come. We've all seen how world events such as COVID and the war in Ukraine can be disruptive to the world supply chains on a local level. Food security and sustainable farming have become household terms, and we can only imagine what the world's food market will look like when populations approach 10 billion people. We understand that going forward as a food company that's committed to supply healthy food and sustainable practices, we need to invest in laying the groundwork today in order to bring value for years to come. On November 18, 2022, we announced an agreement with Agya LLC FZ to manage the day-to-day operations of SADAT. Agya is an international consulting company managed by seasoned professionals in various aspects of the global food supply chain.

5:24 Agia manages the day-to-day operations of SADAT. Our agreement with Agia was designed as a pay-for-performance model where Agia only earns shares of MuscleMaker common stock when they drive net income into the SADAT subsidiary. Agia can earn up to 14,424,275 shares of common stock, which would require them to generate approximately $22,538,000 of net income for SADAT. The calculation of shares earned uses net income generated in CDOT, and this is divided by a premium share price of 1.5625 per share. It's $1.56.25 per share. AGIA also has the right to nominate up to eight new board members, of which one was nominated upon execution of the agreement, and the balance are based on certain net income thresholds.

6:18 These thresholds allow the nomination of two new directors at 3.3 million in net income, two additional new directors at 6.6 million in net income, and the final three new directors at 9.9 million of net income generated into Sadat. The fact that AGIA is paid in shares and can nominate board positions upon performance reflects AGIA's confidence in its abilities to perform as well as its confidence in MuscleMaker's knowledge and management. More than a consultancy agreement, this is really a joining of forces with a common goal. Because Agya can hold more than 20% of the outstanding shares, as well as potential future control of the board of directors, the agreement required that we hold a shareholder meeting to have each of these items approved by our shareholders.

7:04 On February 28, 2023, the shareholders of Musclemaker approved the transaction and all accompanying provisions. We view the formation of SADAT and the agreement with Agya with the approval of our shareholders as our official launch of our diversification strategy. Upon execution of our agreement with AGIA, we began implementing our new strategy by starting with the agro-commodity shipping and trading portion of the food supply chain. To be clear, we're not sitting around with a computer trading electronic commodities. Instead, we're actually shipping and trading physical commodities such as corn, wheat, and rice, which are loaded onto cargo ships and transported between countries. A typical shipment may contain 25,000 to 75,000 metric tons with associated revenue values that range between 5 million to $40 million per shipment.

7:56 Our first shipment was executed in the second half of November, 2022. From mid-November through the end of December, basically half of Q4, Sadat, with Agia's day-to-day management, generated $150,586,000 in revenue. To put that into perspective, the entire prior year revenue for MuscleMaker as a whole was $9,321,000. And in the final six weeks of Q4 alone, Sadat generated $150,586,000 in revenue. This $150,586,000 in revenue generated $4,548,000 in net income, or a 3% profit margin. By achieving this net income threshold and the execution of the agreement, AGA nominated and MuscleMaker approved the addition of two new board members who bring extensive experience in the food supply chain and international business.

8:55 I'd like to welcome Benjamin Patel, who was originally nominated to the Board of Directors upon execution of the agreement with AGIA, as well as Hannah Oh and Ray Shanker to the Board of Directors. Benjamin has worked in the global agricultural commodity trading field for over a decade, and his experience spans across commodity trading, finance, M&A, and operations. Hannah is an experienced agri-food business leader and certified sustainability professional with over 15 years experience with Bayer CropScience and Monsanto. Ray brings international legal expertise as a partner in a law firm where he manages the private wealth and family office practice. These three new members of our board of directors bring a wealth of knowledge to MuscleMaker and help elevate the expertise of the new Sadat subsidiary.

9:44 The agri-commodity shipping business is centered on high revenue, lower margin transactions. We believe we can improve on these margins over time by owning and managing sustainable farms. This will allow us to control the sustainability and quality of products at the farm level and enjoy the increased margins from supplying our own products to the supply chain. In addition, we're in the process of cultivating our banking relationships with international financiers with the goal of developing more elaborate financial instruments, allowing us to conduct different types of transactions by taking possession of the physical commodities for longer periods of time or even owning our own cargo ships. There are many ways to increase margins in this area alone, and we believe we have plans to address these areas in the future.

10:29 In 2023, through the end of February, Zadat has generated over $100 million in additional revenue. This brings the total revenue generated since mid-November 2022 through February 2023 to over $250 million. Now that shareholders have approved the transaction, we believe we can begin executing at a faster pace moving forward. Our next phase with Sadat will be focused on entering farming and sustainable farm management with the goal of increasing margins and control of commodities at the initial stage, as well as enhancing the social, environmental, and financial value to our company. As part of our agreement, all net income proceeds generated by Sadat will be reinvested in growing and executing against the food supply chain strategy.

11:17 Recently, by using proceeds from the $4,548,000 in net income generated in Q4, we placed the deposit on undeveloped farmland in Africa, representing over 27,000 acres of future development. While this transaction is still in negotiation, our intent is to either develop this specific land or use the deposit on a more fully developed property, which could potentially generate revenue in 2023 versus farther down the road. while also providing a potential opportunity to improve the profit margins in the core agro-commodity shipping business. We are excited about the potential of SADAT and our company's advancement in the global food supply chain. We believe our results to date have been very encouraging and we look forward to further building out the supply chain strategy and executing against potentially improving margins.

12:06 Now I'd like to turn the call over to our CFO, Jennifer Black, to review the financial performance of the company for 2022. Jennifer? Thanks, Mike, and thank you everyone for joining us here today. Before I begin, I would like to note that our financial results on Form 10-K were filed with the SEC on March 21st and in a press release that same day. With that, I'd like to give an overview of the financials for 2022. For the year ended December 31st, 2022, our company-wide revenues significantly increased in total 161,698,000 compared to 10,350,000 for the prior year ended December 31st, 2021. The 151,348,000 increase is mainly due to the commodity sales revenue generated by Sadat and its servicing agreement with AggieUp.

13:04 Sadat generated commodity sales revenue of $150,586,000 for the year ended December 31st, 2022. The commodity sales revenue was attributable to the formation of Sadat and the sales generated from physical food-related commodities. This $150 million was generated from November 14th, 2022, which was the date the servicing agreement was finalized with AGIA, through the end of the year. The restaurant division generated company restaurant sales net of discounts of $10,300,000 for the year ended December 31st, 2022, compared to $9,321,000 for the year ended December 31st, 2021. This represented an increase of $979,000 or 11%, which is mainly due to a full year of sales for Pokemoto restaurants and Superfit Foods compared to 2021, when these segments were acquired.

14:05 Franchise royalties and fees for the year ended December 31st, 2022 and 2021 totaled $727,000 and $778,000 respectively. This represents a decrease of $51,000 or 7%. Franchise fees are recognized at income over the life of the franchise agreement. If a franchise location closes or a franchise agreement is terminated for any reason, The remaining deferred revenue will be recognized in full at that time. In 2021, there were several Muscle Maker Grill franchises that closed, resulting in higher franchise fees recognized. Overall, our 2022 loss from operations narrowed by $1,330,000. This is mainly due to Sadat. However, our results were impacted by one-time expenses in 2022 or one-time gains in 2021.

15:03 The one-time transactions that affected our net income for 2021 and 2022 are as follows. In 2021, we recorded $1,920,000 of employee retention credits that reduced our labor expenses. In 2022, we recorded $670,000 of amortization expense that were not recorded in 2021 due to the transitioning of the trademark of Muscle Maker Grill from an infinite life asset to a finite life asset, resulting in an increase in amortization expense. If you remove the effect of these one-time events, the company's loss from operations would have improved by $3,920,000 compared to the $1,330,000 that was disclosed.

15:55 The most significant change in expenses from prior year is the stock-based consulting expense at $3,602,000 for the year ended December 31st, 2022. The stock-based consulting expense is a result of the consulting fees due to Aggie for Sadat operations. Based on these service agreement with Aggie, the consulting fees are calculated at approximately 80% of net income generated by Sadat business segment. This expense is expected to be paid in stock in 2023. To elaborate a little further on the CDOT segment, it generated net income of $4,548,000. However, this net income was offset by the expense of the issuance of shares to AGIA as per the terms of the agreement between MuscleMaker and AGIA for the management of CDOT.

16:50 In the CDOT service agreement with AGIA, Aggia earns MuscleMaker shares at a premium share price of $1.5625 per share and can earn up to 14,424,275 shares, which is the equivalent to generating $22,538,000 of net income into Sadat. Once Aggia has reached the maximum number of shares they can acquire, the consulting fees due to Aggia will accrue as debt payable by Sadat to Aggia. As Mike previously mentioned, we view the agreement with Sadaf as joining forces towards a common goal. Therefore, we clearly see how the expense to AGA is actually an investment towards our future growth.

17:37 As of December 31st, 2022, we had cash balance of $9,898,000 and a working capital surplus of $4,033,000. With that, I'd like to turn the call back over to Michael Roper. Thanks, Jennifer, for that financial overview and kind of amazes me you go through all the numbers and didn't get tongue twisted. So that's actually good. So, hey, we believe our new diversification strategy will have a significant impact on our company. To date, Sadat has generated over $250 million in revenue and reported net income in the Sadat division in Q4 of $4,548,000. MuscleMaker is a food-based company. Simply put, as an example, we feed people, and our company is evolving. Our strategy is changing.

18:29 We like to think of MuscleMaker Inc., which is our parent company, as more of a holding company with multiple operational divisions. Basically, we have the newly created supply chain division, SADAT, and then our restaurant division. We've spoken about SADAT. Now let me walk everyone through an overview of how the restaurant division is performed. Our restaurant division is seeing continued improvements in our key performance metrics. As a percentage of company restaurant net sales, our revenue is up by 10.51%. Our labor percent expense after adjusting for the 2021 ERC credits was reduced by 3.85%. Our rent expense percent reduced by 1.97%. Our other restaurant operating expenses as a percent were reduced by 2.86%.

19:18 And our food and paper costs, although they're up slightly, increased by 0.35%. However, I actually consider the, you know, considering the inflationary pressures on food and paper products in the industry that we face this year, I think we did a pretty good job managing our costs here. So we're up slightly in food and paper costs. And then finally, our SG&A was reduced by 27.5%.